Budget Spreadsheet

http://www.budgetsaresexy.com/2016/07/how-spreadsheet-changed-my-life/

I guest wrote this blog on budgetsaresexy last month - it got picked up by business insider and went viral, very cool.

I would like to explore the reasons why I focus on my financial world, and what I’ve learned along the way.

For me, it began when I wanted to spend a substantial amount of money every month for 3 years and I did not know if I could float it.

I graduated as an engineer in 2007, and after 2 years of designing commercial HVAC systems I decided I wanted to shift career paths and move into business by getting an MBA at a local university. It would cost $400/mo for around 3 years. I did not track my expenses at the time, and I had no real clue if I had room in my budget for it or not. I was desperate for information so I could better manage my money.

During my MBA program, the most important thing I learned was that you can only manage things which you measure. If you do not measure, there is no feedback to improve upon.

I researched online and ended up at Crown Financial which got me recording every expense for a month to decide whether I could cut enough out of my budget to add the MBA program in.

I was making about $50,000 at the time. I was single, visiting restaurants with friends frequently, and spent a good deal of my money on pocket knives and frivolous things that did not improve my life, nor make me happy. I wanted to start the MBA program as soon as possible and I could not do these things immediately because I was not managing my money well. This made me upset, and I became determined to become a better money manager.

The reason I focus on my finances is because I want to spend my money on things I value, and to do that I need to manage the money and know where it’s going. I don’t want to spend $0 dollars each month, but I want every dollar spent to go towards things I enjoy. That was the ground breaking epiphany that hit me years after I started getting serious about my financial state.

After a month of recording every expense, I came up with a spreadsheet that let me track things easier than writing them down on graph paper. I started to actually enjoy inputting my receipts into the excel spreadsheet and balancing it with what my bank accounts said. All in an attempt to be a good steward of my wealth and use it in better ways.

After I determined I could do the MBA program, it became even more important for me to continually track my income and expenses since my fluff income was eliminated.

This spreadsheet slowly evolved over the last 6 years. At first it was just a budget template. Now it is a massive workbook that has all of my critical updated information, and is extremely useful to me when making financial decisions.

I started out just wanting to make decisions wisely. Now I open my dashboard and strive to increase my net worth monthly, and make decisions that help it increase faster, instead of only making decisions based on whether I can fit things into my budget or not.

I was single when this started, and now I am financially responsible for 4 young children and a homemaker wife. Knowing where our money is going is security for us. We can anticipate our future and plan accordingly. Our plan is never exactly correct, but having a plan is important and measuring our spending has been critical to actually owning our decisions.

My spreadsheet has 12 major tabs that are used regularly.

Here is a brief breakdown of each, accompanied with a screenshot to see how it looks in action.

Tab #1: Dashboard

This sheet lets me look at my net worth, my account values, and my current budget state. Below the chart is a net worth tracking area I update monthly after I pay my mortgage.

Tab #2: Checkbook

I input every expense into this sheet and reconcile it with my online accounts daily around lunch time. It gets more difficult to reconcile the longer I wait. I track our budget categories weekly, and close out the week on Thursday night when my wife and I discuss the week ahead.

Tab #3: Budget

Figuring out how to keep track of monthly and annual payments this way has been huge for helping me budget accurately. You can see items 4 and 5 are monthly and annual Bigs (they are detailed below)

Tab #4: Forecast

My spreadsheet knows all of my monthly, annual, and weekly expenses, and will forecast as long into the future as I desire. I quit my mortgage bank escrowing my taxes and insurance monthly, and now I pay my taxes / insurance myself. Doing this allows me to make pinpoint decisions like when we’ll be ready to renovate our kitchen, or how buying a vehicle will impact our resource availability later when we need to pay our home tax and insurance.

Tab #5: Utility

I have to get my utility budget number from somewhere, so I use the last 12 months average. It’s nice having data so I can compare how installing new furnaces / windows will impact my utility bill, and to also make intelligent decisions regarding return on investment when upgrading appliances as well. I usually note on this sheet when certain things happen each year just to keep track of things.

Tab #6: House

This is really just an amortization spreadsheet. Knowing how to do this helped me intelligently compare refinancing options, and showed me how fast changing my mortgage to a 10 year increases our net worth monthly – therefore helping me stomach the pain of eliminating some of my income fluff for good purpose. After seeing the numbers it was impossible to resist. I could talk about this for great lengths, but wouldn’t recommend it without some serious thought. It has added frustration to my life but right now I’m glad we did it.

Tab #7: Gas

Every time I fill up one of our vehicles, I reset the mileage tracker and record the trip miles and overall miles on the receipts to input here later for posterity. It also tells me when to change my oil.

Tab #8: Debt

Our debt has since been cleared, but I assure you there were several accounts here a few years ago while we were steadily hitting them with the snowball method. Here is a snapshot of the last debt we paid off in late November so you can see what the tab looks like:

Tab #9: Bigs

I record the expenses on all of our big items (home, pool, van, lawn work, hobby expenses, veterinarian, health and vacations). It’s nice to be able to look back and see things like this. And when you’re selling a vehicle, having this record can justify a higher price.

Tab #10: Retire

This spreadsheet lets me forecast when I’ll be able to retire based on my current actions. I’m aiming for 55 now. The buttons on the right adjust my salary during retirement to keep a minimum balance of 0 by the time I’m 80, 90, and 99. I think planning for a 4% distribution is probably a wiser way to go…

Tab #11: Invest

This is just an automatically updated sheet that keeps track of my investments and shoots it back to my dashboard report and retirement calculator. I update the shares weekly by hitting the button to add my weekly investments to the total.

Tab #12: College

This lets me calculate how much I need to save for my children’s college. I can hit the button at the top and it will automatically calculate my save/month to make the minimum end balance 0. My current plan involves paying my home off, and then funneling that additional capital over to college savings.

The Current Situation:

At the end of 2011 I completed my MBA and passed my Professional Engineering exam. I was married in January of that same year, and we had our honeymoon surprise of twin girls shortly thereafter. I was laid off in April of 2012 and ended up in another engineering job I truly enjoy and love.

I used some of the excel skills I learned at my old job, and from constantly tweaking my financial spreadsheet, to solve a really big problem at my new job that quickly caused my salary to increase. I was promoted to senior engineer shortly later and recently accepted another promotion shifting from engineering to management.

We had another child (boy in June, 2013) and our 4^th child was just born last month. I’m currently making substantially more than what I was when I was laid off from my old job, and recently was given a company car and enrolled in a golden handcuff program.

Having my MBA turned out to be a key part of why I was promoted to manager from engineering. And tracking my expenses helped get me here.

UPDATE: Within hours this post went viral on Business Insider (over 1.5 million views!!), landed on the home page of Yahoo! Finance, and then went on to hit the top of Reddit getting over 900 comments! Isn’t that incredible?? I knew this was a great post but man… we sure do love our #’s, haha… Thanks again for taking the time, Kyle!

Mortgage Term Return on Investment

Return on Investment

I’ve been digging into what profit really means – and how to use it to make and evaluate personal financial decisions.

One financial decision that has impacted our lives greatly over the last few years was to change our mortgage from a 30yr to a 20yr and then a few years later to a 10yr mortgage.

At the time I looked at total interest paid over the life of the loan and the increase in principal payments over the short term to justify the significant increased risk of tacking a much larger house payment onto our budget, not to mention the discomfort of having to postpone some purchases and adjust our lifestyle to accommodate the larger house payment. In the end I really wanted to have the 15 year mortgage, and that helped push me over the edge to take the plunge.

I made this change a few months before I was married, and my wife at the time was not excited about it. She had lived with a very tight budget for many years prior to our marriage and was looking forward to having some more breathing room in our budget. I had spent a lunch discussing the decision with my father, who agreed with my logic that having a lean budget early on in marriage would be good for us and would teach us to manage our money well and this would pay off for the remainder of our marriage and eclipse any suffering that might occur.

I myself became frantic that I had made a poor decision when my wife gave me the wonderful news that we had accidentally become pregnant on our honeymoon, and then again later on when we found 2 heartbeats in her womb and spent an entire day in quiet reflection realizing our lives would change significantly in 8 months.

Now – 5 years later, looking at moving in the next year or so – I’m so glad we suffered through this. It taught us to budget intentionally and communicate about our money. These skills will follow us through our entire marriage and I now believe the financial discomfort was good for our marriage.

Discussing with a coworker at a previous job his advice was as follows: “There’s something about a 15 year mortgage, you have to pay it off in 15 years.” It’s easy to think that you can just get a longer term mortgage and pay extra down on it, but life happens and you will not. You can easily say the same argument the other way of course, and if you do take the plunge and refinance to a lower term mortgage life will most certainly happen and you could risk having to refinance back to a 30 year loan and pay closing costs again, or potentially having to sell a house you can no longer afford or make other dramatic decisions to make ends meet when life happens.

This is why I would not recommend this to a friend, you have to evaluate the risks and rewards yourself and make the decision. For me, it worked – but it might not work so well for everyone and it could have easily caused us significant problems financially if certain things hadn’t worked out as they had. Now that I’ve framed the article – I’d like to get into some financial details using my actual data.

I purchased my home in July of 2008 for $173,000, at the time I secured a 30yr loan @ 5.5% interest and thought myself one lucky man. This meant I had a monthly payment of $983 with $189 going towards principal monthly. I kept this mortgage for 28 months, paying a total of $29,470 towards the mortgage and only reducing the balance by $6,075. So over 28 months my net worth increased by $6,075. A monthly net worth increase of $217.

I re-financed to a 15 year mortgage on 12/1/2010 at 3.75% interest with a remaining balance of $170,850 after closing costs were included in the loan. Starting out $709 out of a total payment of $1,243 went towards principal. I kept this loan for 43 months, paying a total of $53,426 towards the loan and reducing my balance by $32,555. A monthly net worth increase of $757

For your information there were some circumstances involving home insurance and escrow that made the 3^rd refinance seem like a good idea.

On 8/6/14 I refinanced again to a 10 year mortgage @ 2.75% interest. I had a remaining balance of $140,000 at the time and $1,015 out of a total payment of $1,336 went towards the principal. I’ve kept this loan for 25 months so far and have paid a total of $49,423 and reduced the loan balance by $26,083 with an existing balance today of $114,989. A monthly net worth increase of $1,043.

Obviously making this decision based solely on net worth increase is an easy decision if you have enough fluff in your budget to pull it off. I’d like to explore this a bit more and better understand how to balance the required investment vs potential return here.

Let’s pretend there are 3 options to borrow $173,000 on a home and we plan to sell the home after 5 years for $250,000. We will also plan to spend $30,000 on various improvements and maintenance to the home while living there:

Option 1: 30 year mortgage with 5.5% interest

Monthly Payment: $982.27

Initial Principal Portion: $189.36

Total Interest Paid (over 5 years): $45,893.34

Total Payments: $58,936.50

Average monthly increase in Net Worth over 5 years: $217.38

Average Increase in Net Worth / Total Payment: 22.1%

Total Investment: $88,936.50

Total Return: $90,043.16

Total Profit: $1,106.66 (1.24% of investment)

Total Profit / 5 Years (APY approximate): 1.24% / 5 years = .25% / year

Option 2: 30 year mortgage with 5.5% interest (Pay it off as a 10 year)

Monthly Payment: $982.27 + $895.23 extra payment to pay off in 10 years = total $1,877.50

Initial Principal Portion: $1084.59

Total Interest Paid (over 5 years): $37,942.97

Total Payments: $112,650.28

Average monthly increase in Net Worth over 5 years: $1245.12

Average Increase in Net Worth / Total Payment: 66.3%

Total Investment: $142,650.28

Total Return: $151,707.31

Total Profit: $9,057.03 (6.35% of investment)

Total Profit / 5 Years (APY approximate): 6.35% / 5 years = 1.27% / year

Option 3: 10 year mortgage at 2.75% interest

Monthly Payment: $1,650.61

Initial Principal Portion: $1,254.15

Total Interest Paid (over 5 years): $18,467.40

Total Payments: $99,036.65

Average monthly increase in Net Worth over 5 years: $1,342.82

Average Increase in Net Worth / Total Payment: 81.4%

Total Investment: $129,036.65

Total Return: $157,569.25

Total Profit: $28,532.60 (22.11% of investment)

Total Profit / 5 Years (APY approximate): 22.11% / 5 years = 4.42 % / year

As you can see the 10 year mortgage option yields an APY of roughly 4.5% which is decent - and will steadily hammer an increase in net worth over the life of the loan. This data makes it much easier to stomach discomfort associated with a shorter term loan, and might even persuade me to buy less house with a shorter term loan because of the difference it makes on my monthly net worth increase.